Manufacturing key to Myanmar’s growth

Myanmar has been transitioning to a more open and market-oriented economy over the past few years. While progress has been made throughout the economy, manufacturing has witnessed rapid expansion, accounting for 15 percent of GDP in 2007 but growing to 24pc in 2017. Garment manufacturing, in particular, has grown rapidly, with exports expected to surpass US$3 billion (K4.55 trillion) this year, from less than $1 billion in 2015.

This remarkable expansion in manufacturing can be attributed to Myanmar’s comparative advantage in terms of low labour costs and the favourable external trade environment. While there are opportunities for Myanmar to expand this sector further, there are several challenges that need to be overcome.

With a young and large population, Myanmar will enjoy a demographic dividend for the next few decades. While wages in Myanmar increased with the minimum wage hike earlier this year, they are still among the lowest in the region.

Preferential trade treatment is another key factor that contributes to the growth in export-oriented manufacturing. Myanmar enjoys preferential trade treatment in the US and the EU. In the EU, for example, the “Everything but Arms” initiative gives Myanmar tariff- and quota-free market access.

There have also been concerted efforts by the government to develop the private sector and promote exports as outlined in its national strategy. These efforts have helped boost manufacturing. Also, once the New Companies Law is fully implemented, the improved legal framework will likely attract more manufacturing investment. Under the law, the redefinition of “foreign company” allows companies to optimise corporate ownership and more foreign participation in local firms. This will enable more access to foreign capital, which is otherwise restricted.

Even before the law took effect in August, an increasing amount of investment was already being directed to the manufacture of food, beverages and chemicals, with manufacturing-related foreign direct investment growing from $1.2 billion in fiscal 2016-17 to $1.8 billion the following fiscal year. As a result of these advantages and regulatory changes, manufacturing in Myanmar, particularly in labour-intensive and export-oriented industries, has grown rapidly.

However, Myanmar still needs to address some critical issues if manufacturing is to reach its full potential. The lack of a stable electricity supply and skilled labourers, for example, continues to hinder the expansion of the sector. Other problems for small- and medium-sized enterprises include their lack of access to bank credit, which hampers their ability to expand and upgrade to meet the demands of the local market, let alone foreign markets. All of these conditions can inhibit growth.

As a result, Myanmar still ranks very poorly in the region in terms of the ease of doing business and logistics, especially in transport and customs. Most importantly, the ongoing ethnic tensions in Rakhine State remain a key challenge to boosting private investment and investment from western countries.

The authorities in Myanmar have made efforts to catch up to regional peers. For instance, to reduce bottlenecks caused by high logistics and electricity costs with limited financial resources, Myanmar is increasingly working with development partners and the private sector.

Broader policy measures have also been taken to develop the market-based economy and ensure macroeconomic and financial stability. A market economy can only function well under a stable macroeconomic environment, which will enable manufacturing companies to make medium- and long-term investment and production decisions. The importance of macroeconomic stability cannot be overemphasised. Sustained price stability and exchange rate flexibility will also contribute to maintaining competitive prices in manufacturing.

Myanmar needs to continue to push for structural reform, particularly in the banking and financial sector. Developing the bond market, allowing for more flexible interest rates and allowing foreign banks to play a bigger role in the economy can improve access to credit and invigorate the private sector, including manufacturing. Perhaps even more important to boosting private investor confidence in the economy is the timely enforcement of new laws and strengthening of the rule of law, as pointed out in the 2018 report on Myanmar by the ASEAN+3 Macroeconomic Research Office.

While the challenges can seem overwhelming, they should not be insurmountable, and how well they are tackled will shape the future of Myanmar’s economy and its people.

Jae Young Lee is lead economist and Xianguo Huang is economist at the ASEAN+3 Macroeconomic Research Office in Singapore.

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